Product Lifecycle Analysis

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Product Lifecycle Analysis is an invaluable business framework for developing a robust product marketing strategy. This document details a 5-phase approach to proper Product Lifecycle Analysis and draws out key strategic insights at each stage of the lifecycle. Additional concepts discussed include Consumer Adoption Curve, Bass Diffusion Model, Lifecycle-Performance Factor Matrix, Strategic Positioning, and Substitution Analysis.

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  • 93 09/15/98 11 25
  • Product Lifecycle Analysis

    1. 1. PowerPoint Diagram Pack Product Lifecycle Analysis Product Lifecycle Analysis is an invaluable tool for developing a robust product marketing strategy. This document details a 5-phase approach to proper Product Lifecycle Analysis and draws out key strategic insights at each stage of the lifecycle. Additional concepts discussed include Consumer Adoption Curve, Bass Diffusion Model, Lifecycle-Performance Factor Matrix, Strategic Positioning, and Substitution Analysis. <ul><li>Check out our site for all your PowerPoint needs! </li></ul><ul><li>http://learnppt.com – Find our ebook on creating effective and professional presentations. Covers basic to advanced concepts, including storyboarding, diagramming, and the Consulting Presentation Framework. </li></ul><ul><li>http://learnppt.com/powerpoint -- Shop our catalog of Diagram Packs. We try to add more Packs monthly. All of our diagrams are professionally designed by ex-management consultants from top firms. </li></ul>Innovators (2.5%) Early Adopters (13.5%) Early Majority (34%) Late Majority (34%) Laggards (16%) STAGE 1 INTRO STAGE 2 GROWTH STAGE 3 MATURITY STAGE 4 DECLINE Time / Adoption Saturation / Sales Compactor Dishwasher Color TV Room A/C Automatic Washers Freezers Refrigerators Ranges & Ovens B&W TV Wringer
    2. 2. Contents <ul><li>Overview 4 </li></ul><ul><ul><li>Consumer Adoption Curve 6 </li></ul></ul><ul><ul><li>Product Profitability 9 </li></ul></ul><ul><ul><li>Product Lifecycle Stages 10 </li></ul></ul><ul><ul><li>Strategic Purposes 11 </li></ul></ul><ul><ul><li>Drawbacks 12 </li></ul></ul><ul><li>Product Lifecycle Analysis 14 </li></ul><ul><ul><li>Areas of Analysis 15 </li></ul></ul><ul><ul><li>5 Phases 16 </li></ul></ul><ul><ul><li>Bass Diffusion Model 25 </li></ul></ul><ul><li>Strategic Insights 29 </li></ul><ul><ul><li>Stage-based Strategies 30 </li></ul></ul><ul><ul><li>Strategic Positioning Matrix 35 </li></ul></ul>
    3. 3. Product Lifecycle Analysis is a useful tool for forecasting product sales and developing a product’s marketing strategy <ul><li>Overview </li></ul><ul><li>Product Lifecycle Analysis is a tool to predict how sales will develop based on the age of the product category. Marketers and strategists can use this analysis to predict sales growth, associated customer and competitor behaviors, and, in turn, devise the appropriate product marketing strategy. </li></ul><ul><li>The Product Lifecycle itself it divided into 4 stages of development (see the diagram to the right): </li></ul><ul><ul><li>Introduction </li></ul></ul><ul><ul><li>Growth </li></ul></ul><ul><li>The length of each period varies tremendously. Some products have very short cycles, whereas others can take decades or even centuries to go through the cycle. The lifecycle can be mapped against the consumer adoption curve, where the peak of the curve generally occurs in the Maturity stage of the Product Lifecycle. </li></ul>PRODUCT LIFECYCLE <ul><ul><li>Maturity (and Saturation) </li></ul></ul><ul><ul><li>Decline (and Termination) </li></ul></ul>THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ INTRO GROWTH MATURITY DECLINE
    4. 4. Here is an example mapping various household durables in the early 1970s to their positions on the lifecycle curve <ul><li>Product Lifecycle – Illustrative Example </li></ul>Innovators (2.5%) Early Adopters (13.5%) Early Majority (34%) Late Majority (34%) Laggards (16%) Time / Adoption Saturation / Sales Compactor Dishwasher Color TV Room A/C Automatic Washers Freezers Refrigerators Ranges & Ovens B&W TV Wringer THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ STAGE 1 INTRODUCTION STAGE 2 GROWTH STAGE 3 MATURITY STAGE 4 DECLINE
    5. 5. The appropriate strategy for a business unit depends on the stage of lifecycle for the related industry <ul><li>Product Lifecycle Stages </li></ul>INTRODUCTION Typified by slow growth rate <ul><li>Heavy expenditures across the areas of advertising, selling, sampling, promotion, distribution to stimulate awareness of and demand for the product </li></ul><ul><li>Initial market awareness is minimal, so the focus is on educating the customer to encourage a trial usage (net cash flow and profitability are negative during this stage) </li></ul>DETAILED CHARACTERTIZATION GROWTH Signaled by a significant increase in sales growth and profitability <ul><li>Expenditures remain relatively high, but the focus shifts toward building and holding loyal customers (e.g. product variation increases as more competitors enter market) </li></ul><ul><li>The increase in volume sold more than compensates for the decrease in pricing (driven by competitive pressures and experience curve effects), causing cash flows and profitability to increase </li></ul>PRIMARY CHARACTERIZATION STAGE MATURITY Defined by the reduction in the rate of sales growth and a further reduction in unit costs <ul><li>As the growth rate of the market slows, weaker competitors are forced out— we see larger players consolidating and acquiring smaller players, and excess capacity drives down prices </li></ul><ul><li>Customer preferences and expectations begin to stabilize, driving up competitive rivalry as companies compete for customer loyalty and satisfaction </li></ul><ul><li>By the end of the maturity stage, units sales, cash flows, and profitability all decline </li></ul>DECLINE See a continuation of decline in unit sales, cash flows and profitability <ul><li>Customers switch to new and/or better products—private labels take an increasing market share </li></ul><ul><li>Some competitors maintain profitability by being the focus, niche player with specialized products—however, long term prospects for these small players are unlikely </li></ul>THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
    6. 6. Product Lifecycle Analysis can be used for multiple purposes <ul><li>Strategic Purposes of Product Lifecycle Analysis </li></ul>Product Lifecycle Analysis provides a framework for forecasting industry or product sales. <ul><li>If we presume that every industry and product follows a pre-determined lifecycle, subsequent estimates of sales will be more realistic if current stage in the lifecycle for the industry or product is understood and analyzed </li></ul><ul><li>Similar to the BCG Growth-Share Matrix, this framework can be useful in managing a company’s portfolio of businesses or products—e.g. if your existing products are in the later Maturity stage, begin investing in Introduction or Growth stage products </li></ul>Lifecycle Analysis can be used to hypothesize competitors’ strategic moves. <ul><li>Depending on its stage in the lifecycle, a competitor’s actions should be predictable if they are rational, long-term players </li></ul><ul><ul><li>E.g., investment in capital expenditures should be minimal in the late Maturity stage, as the product of industry is being treated as a “cash cow” (as defined in the BCG Growth-Share Matrix) </li></ul></ul>Lifecycle Analysis can be used the initial step in determining appropriate product pricing. <ul><li>Understanding the stage of the lifecycle will determine the associate customer group on the Consumption Adoption Curve (i.e. Innovators, Early Adopters, Early Majority, Late Majority, Laggards) </li></ul><ul><li>By analyzing the characteristics of these groups, price elasticity can be estimated and prices can be set accordingly </li></ul><ul><ul><li>E.g., Innovators and Early Adopters are not price sensitive and willing to pay much more for an emerging product </li></ul></ul>STRATEGIC PURPOSE DETAILS THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
    7. 7. With all the strategic benefits of Product Lifecycle Analysis, it is important to note this framework’s drawbacks <ul><li>Drawbacks of Product Lifecycle Analysis </li></ul>Lifecycle Analysis is based entirely on time. <ul><li>This framework assumes all industries/products move through a predictable growth pattern as time passes </li></ul><ul><li>This is a limited point of view is and does no consider the structural economics in an industry that might impact sales and profitability </li></ul><ul><ul><li>E.g., not all industries follow an S-shaped sales growth pattern—some industries skip the Introduction stage, others skip Maturity and begin to decline immediately (e.g. due to a disruptive technology) </li></ul></ul><ul><ul><li>Companies can be impact the shape of the sales growth curve through product innovation or strategic market repositioning </li></ul></ul>The actual timing of the lifecycle stages different from industry-to-industry and product-to-product. <ul><li>To use Lifecycle Analysis as a forecasting tool, we must make broad assumptions regarding the stage of the product’s life </li></ul><ul><ul><li>Resultantly, sales forecasts are typically incorrect </li></ul></ul><ul><ul><li>E.g., a slump in sales could be mistakenly be interpreted as that a product has reached the Maturity or Decline stage, when other factors may be at play </li></ul></ul>From a strategic perspective, there is no clear relation between the nature of competition in an industry and its current lifecycle stage. <ul><li>To illustrate this point, some industry remains highly concentrated throughout the lifecycle—others main highly fragmented </li></ul><ul><li>The nature of competition is more dependent on the underlying economics of the business, rather than the lifecycle concept—and over-reliance on this framework may provide misleading conclusions </li></ul>DRAWBACK DETAILS Lifecycle Analysis should be used as a starting point to developing strategic hypotheses—underlying economics should be further analyzed before specific action is recommended. THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
    8. 8. On a high level, Product Lifecycle Analysis involves 3 areas of analysis <ul><li>Areas of Analysis </li></ul><ul><li>Collect existing sales data </li></ul><ul><ul><li>Gather historical and current sales data associated with sales timeframes </li></ul></ul><ul><ul><li>Gather forecasted figures </li></ul></ul><ul><li>Conduct statistical/graphical analysis </li></ul><ul><ul><li>Plot past category sales data in a spreadsheet, such that the long term pattern is easily visualized </li></ul></ul><ul><li>Use strategic/judgmental analysis </li></ul><ul><ul><li>Use the theoretical lifecycle curve to determine where the product category stands </li></ul></ul><ul><li>It is very important to predict the highest potential level sales will reach </li></ul><ul><ul><li>E.g., if we are looking at a household appliance, your calculation may be: Annual Sales = (# of new households) x (% who will buy product) + (# of existing owners) x (% who replace each year) </li></ul></ul><ul><li>Establishing the consumer uptake percentage can be done using: </li></ul><ul><ul><li>Customer surveys (most common method) </li></ul></ul><ul><ul><li>Industry forecasting models/reports (if available) </li></ul></ul><ul><li>To do this, look to the product category’s historical behavior and compare with similar products </li></ul>Forecast how sales will develop. Predict the timing of future developments. Establish if the lifecycle concept is applicable. Product Lifecycle Analysis THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
    9. 9. Phase 1 Define the industry/scope of analysis Industry scope must be defined to identify the appropriate lifecycle stage. <ul><li>Identify the firms considered to be the major competitors in the industry </li></ul><ul><li>Use this information to identify the Standard Industrial Classification (SIC) code for the firms in the industry </li></ul><ul><li>Once the SIC is known, a time series of industry sales volume can be constructed </li></ul><ul><li>Note: The SIC code process for defining the industry may not work in all case </li></ul><ul><ul><li>If companies are in multiple lines of business (e.g. conglomerates, diversified companies), only their primary industry affiliate will be reflected (i.e. the industry where the majority of production resides) </li></ul></ul><ul><ul><li>SIC codes are sometimes too broadly defined and thus include companies that are not direct competitors within the industry under analysis </li></ul></ul><ul><ul><li>If this is the case, use industry analyst reports, trade associations, and other secondary research instead to identify the industry and related performance metrics </li></ul></ul>THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Define the industry/ scope of analysis Determine the level of lifecycle perf. metrics Identify the lifecycle stage Forecast sales based on lifecycle stage Develop strategic hypotheses and action steps 1 2 3 4 5
    10. 10. This is a typical Lifecycle-Performance Factor Matrix <ul><li>Lifecycle-Performance Factor Matrix </li></ul>The matrix above is true to most industry and product lifecycles, but many exceptions exist. EXTERNAL PERFORMANCE FACTOR LIFECYCLE STAGE Source: Hax and Majluf, 1984 THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Low Stable Stable High Technology Innovation High High Increasing Low Barriers to Entry Stable, customers loyal Stable, strong loyalty Stabilizing Unstable Distribution/Stability of Market Share Decreasing Several, consolidation occurring Increasing Few Number of Competitors Decreasing Wide, private label emerging Increasing Narrow Breadth of Product Lines Weak Moderate Strong Uncertain Market Industry Potential Negative, increasing Positive, decreasing Positive, increasing Positive, increasing Relative Growth Rate DECLINE MATURITY GROWTH INTRODUCTION Define the industry/ scope of analysis Determine the level of lifecycle perf. metrics Identify the lifecycle stage Forecast sales based on lifecycle stage Develop strategic hypotheses and action steps 1 2 3 4 5
    11. 11. In addition to validation, these generic performance metrics can provide strategic insight <ul><li>Generic Performance Metrics by Lifecycle Stage (2 of 2) </li></ul>PERFORMANCE FACTOR Source: Michael Porter, Competitive Strategy Use these metrics and trends to develop strategic insight into the market dynamics. THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ <ul><li>Cost management is key </li></ul><ul><li>Bad time to increase share, change price, or quality image </li></ul><ul><li>Competitive cost structure key </li></ul><ul><li>Marketing effectiveness is key </li></ul><ul><li>Practical to change price or quality image </li></ul><ul><li>Marketing is key function </li></ul><ul><li>Best period to increase share </li></ul><ul><li>R&D and engineering are key functions </li></ul>Overall Strategy <ul><li>Low prices and margins </li></ul><ul><li>Price may rise in late decline </li></ul><ul><li>Falling prices, lower profits and margins </li></ul><ul><li>Lower dealer margins </li></ul><ul><li>Increase market share stability </li></ul><ul><li>Poor acquisition climate, tough to sell companies </li></ul><ul><li>High profits, fairly high prices </li></ul><ul><li>Recession resistant </li></ul><ul><li>High P/E ratios </li></ul><ul><li>Good acquisition climate </li></ul><ul><li>High prices and margins </li></ul><ul><li>Low profits </li></ul><ul><li>Price elasticity low </li></ul>Margins and Profits <ul><li>Cyclicality </li></ul><ul><li>Growth covers risk taking behavior </li></ul><ul><li>High risk </li></ul>Risk <ul><li>Exist </li></ul><ul><li>Few competitors </li></ul><ul><li>Price competition </li></ul><ul><li>Industry shake out </li></ul><ul><li>Increase in private brands </li></ul><ul><li>Entry high, many competitors </li></ul><ul><li>Increasing mergers </li></ul><ul><li>Few competitors </li></ul>Competition <ul><li>No exports </li></ul><ul><li>Significant imports </li></ul><ul><li>Falling exports </li></ul><ul><li>Significant imports </li></ul><ul><li>Significant exports </li></ul><ul><li>Few imports </li></ul><ul><li>Some exports </li></ul>Foreign Trade DECLINE MATURITY GROWTH INTRODUCTION Define the industry/ scope of analysis Determine the level of lifecycle perf. metrics Identify the lifecycle stage Forecast sales based on lifecycle stage Develop strategic hypotheses and action steps 1 2 3 4 5
    12. 12. Phase 4 Forecast sales based on lifecycle stage Sales volumes can be estimated using the lifecycle stage—this is done by adjusting the historical growth rate of sales based on the knowledge traditional sales patterns in the lifecycle. Source: Monroe, Pricing, 1990 0 Units, Sales Growth Rate Sales Sales Growth Rate Time THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Define the industry/ scope of analysis Determine the level of lifecycle perf. metrics Identify the lifecycle stage Forecast sales based on lifecycle stage Develop strategic hypotheses and action steps 1 2 3 4 5 STAGE 1 INTRODUCTION STAGE 2 GROWTH STAGE 3 MATURITY STAGE 4 DECLINE
    13. 13. Here is the Bass Model Diffusion Equation <ul><li>Bass Diffusion Model – Equation </li></ul>The Bass Model approximate the S-curve using the following adoption equation: Where: P t probability of a purchase at time t, given that no purchase has yet been made p coefficient of innovation, initial probability of adoption (from comparable products) q coefficient of imitation, measure of the “word of mouth” effect (from comparable products) y t-1 cumulative sales prior to period t (i.e. including period t-1) m market potential / potential sales volume (determined from market research) (y t-1 /m) fraction of the Total Available Market (TAM) who have tried the new technology <ul><li>Using this probability estimate, sales volume resulting from new adopters in any period would be equal to the remaining potential sales multiplied by P t </li></ul><ul><li>Mathematically, sales volume in any period would be given by: </li></ul>THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Define the industry/ scope of analysis Determine the level of lifecycle perf. metrics Identify the lifecycle stage Forecast sales based on lifecycle stage Develop strategic hypotheses and action steps 1 2 3 4 5
    14. 14. To use the Bass Model, historical sales growth patterns of comparable products must be identified <ul><li>Bass Diffusion Model – Growth Rate Parameters </li></ul><ul><li>Historical sales growth patterns of comparable products must be identified </li></ul><ul><ul><li>It is important to identify an analogous product that matches the likely growth pattern of the new product innovation, rather than attempting to find an analogous product in the same industry </li></ul></ul><ul><ul><li>These analogous product innovations help develop an initial estimate of the p and q parameters for the model </li></ul></ul><ul><ul><li>The table below presents some of sample parameter estimates </li></ul></ul>For example, sales data for color TVs or DVD players could be used to estimate the market potential and penetration rates hi-definition TVs Source: Urban and Hauser, 1993 PRODUCT INNOVATION SAMPLE GROWTH RATE PARAMETERS THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ 0.36 0.017 Clothing dryers 0.36 0.007 Motels 0.38 0.009 Boat trailers 0.42 0.010 Air conditioners 0.54 0.018 McDonalds 0.65 0.025 Record players 0.84 0.005 Color TV 1.01 0.039 Hybrid corn q p 0.34 0.009 Power lawnmowers 0.17 0.018 Home freezers 0.22 0.003 Electric refrigerators 0.24 0.006 Electric blankets 0.25 0.028 Black and white TV 0.30 0.018 Water softeners 0.30 0.017 Automatic coffee makers 0.33 0.029 Steam irons Define the industry/ scope of analysis Determine the level of lifecycle perf. metrics Identify the lifecycle stage Forecast sales based on lifecycle stage Develop strategic hypotheses and action steps 1 2 3 4 5
    15. 15. In the Introduction stage, get your pricing strategy right <ul><li>Introduction Stage Strategies </li></ul>INTRO GROWTH MATURITY DECLINE THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Pricing should receive special attention in the Introduction stage  Monitor competitors and adjust positioning to preempt competitive moves  Experiment with production processes to ensure continuous improvement and innovation  Invest heavily in advertising, selling, sampling, promotion, and distribution to stimulate diffusion of the new product to earn new customers  Thus, the pricing decision must be made by weighing the benefits and risks of potential market demand (size and growth), competitive entry, and technological development  Although competitors will be less likely enter the market, a technological innovation may make the current product obsolete  If prices are set low, initial investment in the product may not be recovered  Competitors will enter the market, pushing prices down, unless the incumbent has a cost advantage (e.g. economy of scale, experience, investment required)  By setting prices high, margins will be maximized—minimizing consumer surplus with innovator/early adopter markets  There are two general pricing strategies in the Introduction stage: 1) set prices high to “skim the market,” or 2) set prices low to maximize “market penetration” – decision on strategy depends on level of competition 
    16. 16. The Maturity stage leads to 3 strategic options <ul><li>Maturity Stage Strategies </li></ul>INTRO GROWTH MATURITY DECLINE THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Based on the competitive dynamics in the industry, there are 3 strategies we should follow to extend the profitability and duration of the Maturity stage  <ul><li>Innovation </li></ul><ul><li>Employed to expand the market, fill customer needs, and preempt competition </li></ul><ul><li>Develop product innovation through “flankers” (E.g. new flavors, colors, sizes, new uses and users (e.g. Arm & Hammer’s baking soda to deodorize refrigerator smells), or significant product innovation (e.g. cannibalization, introduction of new models) </li></ul><ul><li>In addition to these generic strategies, we should identify and exploit core competencies and competitive advantages to survive the industry shake-out/massive consolidation at the end of the Maturity stage (e.g. brand equity, cost advantages, channel dominance/partnerships) </li></ul> <ul><li>Defense </li></ul><ul><li>Employed when new or current competitors are altering the status quo by changing their marketing mix (i.e. product, pricing, promotion, placement) </li></ul><ul><li>Adjust advertising and promotion, improve their product performance, modify pricing, and alter distribution spending to maintain profitability </li></ul> <ul><li>Maintenance </li></ul><ul><li>Employed when the threat from competitive entry or technology innovation are minimal </li></ul><ul><li>Maintain the market position/profitability through advertising, promotion, and pricing </li></ul><ul><li>Monitor competitive positioning, product development activities, and general business and macro-environmental trends </li></ul>
    17. 17. We create a strategic positioning matrix by intersecting the lifecycle stage with the company’s competitive position <ul><li>Strategic Positioning Matrix </li></ul>COMPETITIVE POSITION LIFECYCLE STAGE Source: Hax and Majluf, 1984 THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Abandon Turnaround or Phased withdrawal Turnaround or Abandon Up or Out Phased withdrawal or Abandon Find niche and hang on or withdrawal Find niche and protect it Selectively push for position Harvest or Phased withdrawal Find niche and attempt to protect it Maintain share Attempt to improve position Selective fight for market share Selectively attempt to improve position Selective fight for market share Hold position or Harvest Hold position Growth with industry Attempt to improve position Push for share Attempt to improve position Fight for market share Hold position Hold position Growth with industry Hold position Hold share Hold position Fight for market share DECLINE MATURITY GROWTH INTRODUCTION DOMINANT STRONG FAVORABLE TENABLE WEAK NONVIABLE
    18. 18. END OF PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
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